I personally think 401K accounts are great tools for workers to save for retirement, especially if the employer matches some of the employee’s contributions. Many people don’t realize it, but a 401K account can also help a home buyer purchase a home.
Many, but not all, 401K fund managers permit the account holders to borrow from their 401K accounts to help fund a home purchase. If the fund manager allows this, home buyers can typically borrow up to 50% of their account balance or $50,000, whichever is less. Because this is technically a loan, the home buyer does not pay an IRS penalty to access the account funds prior to retirement and the home buyer must repay the loan based on a schedule set by the fund manager.
As is often stated on the Mortgage Blog, home buyers can buy homes using less than a 20% down payment. In many cases, buyers can obtain a conventional mortgage with only 5%, and sometimes even 3% down. With today’s high home prices, accessing the 3% or 5% required down payment can still be problematic for some buyers. But if those buyers have a 401K account with a substantial balance, borrowing against the 401K balance could make home ownership a reality.
From an underwriting standpoint, the borrower must provide documentation showing that the fund manager permits accessing the 401K funds for a home purchase and 401K account statements showing the balance before taking the loan along with documentation of the funds transfer from the account. Home buyers using 401K funds should plan to start the 401K loan early in their loan approval process. Waiting too long could delay closing as underwriters must review and sign off on the funds transfer. One more added benefit is that, although accessing 401K funds is a loan that must be repaid, underwriters do not include the 401K loan payments in the debt-to-income ratio calculation.
Here is an article giving one financial planner’s perspective on accessing 401K account funds. This planner endorses using 401K funds to buy appreciating assets like a home. But she points out that there are some drawbacks to a 401K loan, including (1) it is a loan that requires monthly payments, so adding the 401K loan payment and a new mortgage payment could “stretch” a buyer’s finances, (2) taking money out of the market could cause the buyer to miss market appreciation during an rising market, and (3) if the buyer changes jobs, the employer might require that the 401K loan be fully repaid shortly after the job change. Ultimately, the home buyer can evaluate her situation, and if she thinks using 401K funds to buy a home now is more valuable than these concerns, then borrowing from the account to buy a home can be a wise option.
Are you considering buying a home in Georgia but have limited available cash for a down payment? If you have been using a 401K account to save for retirement, you might be able to buy a house sooner than you think. Give me a call and let’s discuss your options.
I am going to pick up right where my colleague Rodney Shaffer left off with his recent blog post. Buyers do not need 20% down to purchase a home. Honestly, we should do a post on this topic monthly because we hear it monthly from clients who think they way more down than is necessary to purchase a home.
Rodney’s recent post focused on an article he came across saying “20% is best” when buying a home. What the article doesn’t detail is home appreciation is rapidly outpacing one’s ability to save. So a $300,000 home with 20% down won’t be the same home when the $60,000 is saved years from now.
I’m focusing on a recent study by the National Association of REALTORS stating almost half of would be home buyers believe they need a larger down payment than is actually required. About 35% of would be buyers believe the down payment needed is more than 15%. Another 10% of would be buyers believe the minimum down payment requirement is more than 20%.
You do not need 20% down in order to purchase a home:
Conventional loans require as little as 3% down. Meaning, a home at $600,000 could be purchased with as little as $18,000.
Ideally buyers put 5% down for conventional loans as the interest rate is better and the monthly PMI is lower. On the same $600,000 home, the down payment would be $30,000.
FHA loans only require 3.5% down. The max FHA loan limit in metro Atlanta is just over $470,000. Meaning, a purchase price just under $490,000 with 3.5% down (roughly $20,000) is all that is needed.
I know there is an aversion to paying monthly Private Mortgage Insurance (PMI). This is required when purchasing a home with less than 20% down. I get it, yet, PMI payments aren’t necessarily the end of the world. Let’s look at two recent clients:
One client purchased a home around $300,000 and had 15% to put down. Instead of waiting to save an additional $15,000, they put 15% down and will pay $26 per month in PMI for just a few years.
Another client purchased a home around $400,000 and put 10% down. Instead of waiting to save an additional $40,000, they are paying just over $40 per month in PMI for several years.
When you compare the monthly payments on PMI to continuing to rent, not getting appreciation for a home you own, locking in an interest rate now, trying to save more and more money… paying PMI isn’t as bad as it seems.
If you’ve made it this far into the post – thank you for reading! If you do not remember anything else from this post, please remember (and tell all your friends), buyers do not need 20% down to purchase a home!
Speaking of purchasing a home, if the purchase is in the state of Georgia, contact me today! I can get you well on your way to owning a home!
The 20% down payment myth is driven by the fact that borrowers must pay PMI when obtaining a conventional loan with less than 20% down. Many home buyers want to avoid the added monthly PMI cost. I personally think that PMI is an effective tool to help some people buy homes sooner. I recently had a friend refer his adult daughter to me. When I counseled her to make a 5% down payment and pay the monthly PMI, Dad challenged me. Here’s how I explained it to him.
His daughter wanted to buy a $200,000 house and had about $25,000 of savings. A 5% down payment was $10,000 and a 20% down payment was $40,000. Remember that a home buyer must pay closing costs and prepaid escrow at closing, in addition to the down payment. And I always recommend that buyers keep cash available in a bank account after closing, to provide a “reserve” should an emergency arise.
The $10,000 down payment left her with $15,000 for closing costs, prepaid escrow, and her “emergency fund.”
To avoid PMI, she would need to save another $25,000 or more for the 20% down payment. I asked Dad how long it would take her to save that and he said 5 to 10 years. I then told Dad that with Anna’s great credit score and 5% down payment, her PMI cost would be less than $60 per month.
She could stop paying rent and buy a house now in a rapidly appreciating home market. Paying PMI to buy now would enable her to build equity as home prices rise, rather than just continuing to save more and more to keep up with rising home prices while she rented and saved (not to mention that a $200,000 home today is no longer going to be a $200,000 home in the 5-10 year time frame it would take to save up 20%).
And current interest rates are near historic lows. There’s no way to predict now what future interest rates would be when she finally saved enough to pay 20% down.
When I explained the math, her dad agreed and she bought a home with a 5% down payment.
Note that PMI premiums are calculated based on the down payment amount and the borrower’s credit score. In general, the lower the down payment, the higher the PMI premium. And in general, the lower the borrower’s credit score, the higher the PMI premium. So not everyone will have such a clear choice as Anna did. But for borrowers with good to great credit scores, my opinion is that paying mortgage insurance is often better for building wealth than paying rent and waiting to save the full 20%.
Do you know someone in Georgia who fears they are “missing out” as they rent while home values rise rapidly? If yes, please connect them with me. I’ll work to help them buy sooner with a mortgage that best fits their need, with as small of a down payment as possible.
I know I posted this information about a year ago, but I hear this myth so often in the mortgage market, I will keep repeating this…..You do NOT need 20% down to buy a home!
According to recent National Association of REALTORS data, the average down payment made by recent home buyers is 12%. Younger buyers tend to put down less. Buyers between age 22 and 30 made an average 6% down payment. Recent home buyers between age 31 and 40 made an average 10% down payment. This ultimately follows common sense, as younger buyers have had less time in the work force to save for a down payment.
Veterans using VA mortgage financing can obtain loans with a 0% down. FHA mortgages have a 3.5% down payment requirement. And borrowers can obtain conventional mortgages with only 3% down.
The 20% down myth is driven by the fact that borrowers must pay PMI when obtaining a conventional loan with less than 20% down. Many home buyers want to avoid the added PMI cost in their monthly payment. But I personally think that PMI is an effective tool to help people buy homes and build wealth sooner. I recently had a friend refer his adult daughter to me. When I counseled her to make a 5% down payment and pay the monthly PMI, Dad challenged me. He did not want her to pay PMI. In my next blog post, I’ll explain my PMI response to Dad. Spoiler alert….the daughter did by a house with 5% down and paying PMI – it made very good financial sense.
Do you know a friend or family member who wants to buy a home in Georgia? Don’t let them by discouraged by the 20% down myth. Tell them that is only a myth and then connect them with me. It is very possible that I can help them finance a home purchase sooner, instead of waiting to save more money. We will work to make their home ownership dreams a reality – hopefully right now.
A recent National Association of Realtors (NAR) economist blog noted that 24% of first-time home buyers obtained FHA financing in January, while 59% obtained conventional mortgage financing. This is very interesting as it contrasts the picture painted in my blog post from September 2019. That post noted that 75% of Millennial home buyers obtained FHA financing. While not all first-time home buyers are Millennials, the recent data still appears to be a significant change from only about 18 months ago.
FHA mortgages once attracted many first time home buyers with a 3.5% minimum down payment. But beginning in 2014, home buyers could obtain conventional loans with only a 3% down payment. FHA loans also appeal to home buyers with lower qualifying credit scores. Conventional interest rate pricing charges higher interest rates for lower credit scores. Because FHA pricing places less emphasis on the borrower’s credit score than conventional loans, FHA pricing was often more attractive to buyers with credit scores less than 700, especially when those buyers could only make a small down payment.
Note that “standard” conventional loans with a 3% down payment require the borrower to pay a higher interest rate and mortgage insurance premium as compared to 5% (or more) down conventional loans. But conventional mortgage giants Fannie Mae and Freddie Mac began offering special loan programs (called Home Ready and Home Possible, respectively) to home buyers whose annual income falls below a threshold (currently about $65,000 in the Atlanta area) and with credit scores of 680+. With these programs, 3% down conventional loans become very competitive with FHA loans for buyers who qualify.
When a buyer qualifies for the Home Ready / Home Possible program discounts, they can save money in two ways as compared to FHA financing. First of all, conventional loans do not require up-front mortgage insurance. FHA loans require a 1.75% up front mortgage insurance premium that is typically rolled into the loan amount. Secondly, when the borrower’s equity reaches 20%, the conventional loan mortgage insurance can be cancelled, even when the borrower initially made only a 3% down payment. Borrowers who use FHA mortgages with less than a 10% down payment must pay monthly mortgage insurance premiums for as long as they own the mortgage. The monthly FHA insurance premium is 0.85 for all loans with less than 10% down payments. That is about $177 per month on at $250,000 mortgage. The fact that such a large insurance premium is permanent makes many buyers consider conventional loans more favorably.
Are you considering your first home purchase? Be sure to explore all the loan programs available to you, including conventional and FHA mortgages. Give me a call and I’ll help you compare your options to determine which will give you the lowest total payment, considering both the interest rate and the mortgage insurance components.
I am very excited about this news. A bipartisan group of Washington legislators has introduced the American Dream Down Payment Act of 2020. If enacted, this bill would create special tax-advantaged savings accounts for eligible housing costs. The goal is to create down payment savings accounts similar to the 529 college education savings accounts. As a parent of college-aged children, I can say from experience that the 529 accounts have been a real blessing for my family. I think the tax savings are a great incentive to get potential home buyers saving for a purchase.
Alabama Senator Doug Jones stated, “Down payments are the biggest barrier to homeownership for first-time homebuyers, especially among low-income and minority Americans, and make it harder to build generational wealth that is often tied to home-ownership. Our legislation would provide a new path to help make the dream of buying a home a reality by making it easier to save money for down payments and other housing-related costs.”
Colorado Senator Cory Gardner said, “A down payment on a home can be a significant barrier to becoming a homeowner. Inspired by the popular 529 education savings accounts, this bipartisan bill will make it easier for people to save for a down payment.”
The bill’s sponsors cite a survey of renters that shows two-thirds view a down payment as a significant barrier to home ownership. Saving for a down payment can be harder with rising rents and student loan debts. Under the American Dream Act, states would establish the accounts and manage them like they manage 529 accounts today. The bill would allow potential home buyers to save up to 20% of today’s housing cost to use for eligible down payments and other housing costs. The bill would also allow family and friends to contribute to the accounts, the earnings from which could be used tax-free when withdrawn for eligible housing expenses.
The National Association of Realtors, Habitat for Humanity and the National Association of Real Estate Brokers all support this legislation.
I will now reiterate a statement I made in a recent blog post, a 20% down payment is not required to buy a home. Many home buyers obtain conventional loans with only a 5% down payment – even 3% down if they are willing to pay a higher interest rate. And there are income-based conventional loan programs that offer discounted interest rates and mortgage insurance for a 3% down payment – for those buyers who qualify. Home buyers can obtain 3.5% down FHA loans. And military veterans can buy a home with a zero down VA loan. Many potential home buyers might be able to purchase a lot sooner than they think.
Do you know someone (a friend or family member) who wants to buy a Georgia home, but who is afraid she won’t qualify? Connect your friend or relative with me. I’ll help her understand where she stands regarding qualifying for a home purchase. And, if necessary, I will help her plan for a future home purchase when she is ready, perhaps using a new American Dream account.
Millennials are the largest generational group in US history. This year, the largest section of Millennials will turn age 30, entering what many consider to be “prime homeownership years.” So how is the pandemic impacting these potential home buyers? Two recent studies have addressed this topic.
The first, by First American economist Mark Fleming is more optimistic than the second. Fleming states that the pandemic has delayed, but not denied, homeownership for Millennials. He notes that household formation is a key driver of home demand, and that the Millennial generation is making lifestyle decisions that “will continue to support potential homeownership demand in the years ahead.” He further states that Millennials “may fuel a ‘roaring 20’s’ of homeownership demand.” As a loan officer, I love optimism in the housing market!
On a less optimistic note, a realtor.com report stated that pandemic-related unemployment could further delay Millennials’ homeownership dreams. It expresses concern that unemployed potential homebuyers will live from their savings. And it could take them years to recoup their savings once the go back to work. The article then references how a 10% down payment on a $320,000 home (the median list price of a US home in April), is $32,000. Ultimately, it can take people months, if not years to save tens of thousands of dollars for a down payment.Here’s the good news related to down payments – a 10% down payment is not required. Many home buyers obtain conventional loans with only a 5% down payment – even 3% down if they are willing to pay a higher interest rate. And there are income-based conventional loan programs that offer discounted interest rates and mortgage insurance for a 3% down payment – for those buyers who qualify. Home buyers can obtain 3.5% down FHA loans. And military veterans can buy a home with a zero down VA loan.
While obtaining a mortgage with a less than 20% down payment requires paying for mortgage insurance (except for VA loans), my opinion is that paying the mortgage insurance to buy a house sooner is often better than waiting and paying rent. As long as home prices continue appreciating, the homeowner will likely build wealth even if they have to pay the mortgage insurance. And in my opinion, growing wealth is superior to expense only home rental payments.
Are you or someone you know a Millennial wanting to buy a home in Georgia? I would love to help. We can explore low down payment and other options to help you buy a home (and start growing your wealth) sooner rather than later. Give me a call and let’s get started.
It’s fascinating to see studies about how the pandemic could impact the future residential real estate market. The latest Mortgage Blog post noted that many city dwellers are now considering a move to the suburbs. Here’s another impact: A recent renters survey showed that 35.9% of all renters say they likely will not renew their lease, while another 38% are not sure or are somewhat likely to renew their lease. Most striking is that 41.6% of renters who pay $1,750 or more per month say they will likely not renew their lease. The article states that apartment fitness centers, pools, and clubhouses closed due to the pandemic contributed to this renter sentiment.
As someone who likes growing my net worth, I must say this survey makes sense to me. At today’s historically low interest rates, it is possible for someone in the Atlanta area to buy a $300,000 home with a 5% down payment, and have a mortgage payment of only about $1,750 per month. (This assumes a 3.5% interest rate.) With a monthly rent payment, the entire amount is an expense. Renters do not build wealth from their residence. But a home buyer begins building her net worth with her first mortgage payment. For the scenario mentioned here, the very first mortgage payment includes $448.53 of principal, or equity in the home. So only $1,302 is an expense. That seems like a better use of money to me.
And, given recent home price appreciation, it is reasonable to assume that an owner’s home will appreciate over time, building additional wealth. So home owners build wealth with appreciation over time and with each payment. My question is, “Why would someone pay $1,750 in monthly rent when they could own a $300,000 home instead?” I suppose I can understand if people love their apartment’s amenities or if they don’t want to deal with home maintenance issues.
But many people believe myths that make them think they cannot buy, when they actually can. One myth is that a buyer must make a 20% down payment. I have closed many mortgages where the home buyer made only a 3% down payment. And I’ve closed VA loans where the borrower paid $0 down. To fund 3% down payment a buyer can get a gift from a relative or perhaps borrow from a 401K account. Another myth people believe is that they must have “great” credit. Even in the pandemic world, we can close mortgages for people with a 620 credit score. And there are ways to improve a credit score over time.
Would you like to grow your wealth every month with homeownership in Georgia instead of making an expense-only rent payment? If yes, contact me today. We can start planning now to help you buy a home as soon as possible.
A recent survey of 1,045 adults found that 77% of the Gen Z and Millennial cohorts expect their parents’ financial assistance when purchasing their first home. Of the young people surveyed, 38% expected help funding a down payment, 31% expected parents to co-sign on their mortgage, and 24% percent expected help covering closing costs. From the lender’s perspective, this is all very doable as long as the needed documentation is delivered and all other lending criteria (e.g., credit scores and debt to income ratios) are carefully met. Documenting financial assistance from relatives can be challenging if the borrower does not plan in advance, so here are some suggested “best practices” for home buyers who expect this help.
The “gifts of cash” concept covers help covering both down payments and closing costs, as mentioned in the survey. Parents and other relatives can give cash to cover all aspects of the buyer’s cash to close – down payment, closing costs, and prepaid escrow. To be approved, such gifts need to come from documented relatives, which includes parents, grandparents, siblings, and even aunts and uncles, along with spouses, domestic partners, and fiancés. From experience, I can report that underwriters will likely not approve gifts from nieces or nephews and not from ex-spouses, as the relationship has been legally terminated.
Underwriters expect gifts to be carefully documented. This includes a gift letter signed by both giver and buyer. The letter states that the money given is a gift, and not a loan. Loans to help buyers are prohibited. If the giver makes the gift using a check, the underwriter will want to see a copy of the check. And if the gift occurs before closing, the underwriter will want to see bank statements from the giver and the buyer showing the funds coming out of the giver’s account and into the buyer’s account. For some loan types, the giver may have to show proof of funds and document the source of any “large deposits” into the giving account. My preference for conventional loans is to have the giver wire the funds directly to the closing attorney’s escrow account. When this is done for a conventional loan, the only documentation typically required for the buyer and giver is the gift letter itself. It’s much simpler and less time consuming, so I recommend this approach when possible.
Relatives and even friends can co-sign mortgages along with the home buyer. (Yes, friends can co-sign…I recently verified this for a potential client.) To do this, we combine loan files for the buyer and the co-signer. As long as the combined file meets all underwriting criteria (credit scores, available cash to close, and combined debt to income ratio), underwriting will approve mortgages including the “non-occupant co-borrower.”
Do you know a young person who wants to end her expense-only monthly rental cost? Ask her if she is expecting an income tax refund this year. Then connect her with me. I’ll help her explore how best to fund a home purchase with that refund and assistance from family, if necessary.
More Covid related news… this week a large nation wide bank stated they were changing conventional loan requirements for buyers. Instead of using Fannie Mae and Freddie Mac guidelines, now buyers will need at least 20% down and a 700 (or higher) credit score.
Is this a growing trend in the mortgage industry? Is this bank acting alone?
The real question is “what are Fannie Mae and Freddie Mac saying?” Fannie and Freddie have made no changes to their guidelines in terms of existing credit scores or minimum down payments.
3% is still the minimum required down payment for conventional loans
620 is the minimum required credit score
While there have been changes to credit score requirements on government loans, increasing the down payment and credit score on conventional loans is not in play. Until Fannie Mae or Freddie Mac change their guidelines, this is an isolated event and not a trend.
Wanting to purchase a home in the spring market? Needing to buy a home with below average credit or a small down payment? Those loans still exist! If you are looking to buy in the state of Georgia, contact me today. I can get you prequalified in a few minutes, and we can have a talk about the landscape of the mortgage industry in the time of Covid.
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services and a writer for “the Mortgage Blog.” If you would like to be a guest writer for "the Mortgage Blog" please contact Clay for details.
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